The National Association of Home Builders/Wells Fargo builder sentiment index released Monday leaped to 52 this month from 44 in May. It was the largest monthly increase since 2002.
A reading above 50 indicates more builders view sales conditions as good, rather than poor. The index hasn't been that high since April 2006, just before the housing market collapsed.
Measures of customer traffic, current sales conditions and builders' outlook for single-family home sales over the next six months also soared to their highest levels in seven years.
The housing recovery is looking more sustainable and should continue to boost economic growth this year, offsetting some of the drag from higher taxes and federal spending cuts.
Steady hiring and low mortgage rates have encouraged more people to buy homes. The increased demand, along with a tight supply of homes for sale, has pushed home prices higher. That's made builders more optimistic about the market for newly built homes, leading to more construction and jobs.
In April, applications for new home construction reached a five-year peak. And sales of new homes rose to a seasonally adjusted rate of 454,000, nearly matching the fastest pace since July 2008. Sales are still below the 700,000 pace considered healthy by most economists. But they have risen 29 per cent in the past year.
Single-family home construction slowed in April to a seasonally adjusted annual rate of 610,000 homes, but that's expected to grow sharply in coming months.
"We are forecasting a considerable acceleration," said Greg Bird, associate economist with Moody's Analytics, which projects that housing starts on single-family homes will reach an annual rate of 1.6 million by the end of 2014.
In recent weeks, many of the major large homebuilders have reported strong annual growth in sales during the spring home-selling season. The increased demand has paved the way for builders to raise prices and ramp up construction of more homes, despite lingering concerns over rising costs for land, building materials and labour.
"Builders are experiencing some relief in the headwinds that are holding back a more robust recovery," said David Crowe, the NAHB's chief economist.
Homebuilder Mitchell & Best, which builds homes in Maryland and Virginia, expects to deliver between 30 per cent and 40 per cent more completed homes this year than in 2012, said vice-CEO Marty Mitchell.
"As a small local builder who has been through trials and tribulations the last seven years, we're definitely seeing an improvement in the market," Mitchell said.
Still, the company, which sells homes ranging from $700,000 to $1.5 million, is struggling to find enough land to build more homes.
Land in the Washington metro area remains scarce. And the price has risen sharply in the past year as demand for new homes has increased.
Mitchell said he hopes to boost construction next year ahead of this year's levels, so long as the company can tie down a few more tracts of land.
Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to NAHB statistics.
The latest builder confidence index was based on responses from 255 builders.
A gauge of current sales conditions for single-family homes jumped eight points to 56, the highest level since March 2006, while a measure of traffic by prospective buyers improved seven points to 40.
Builders' outlook for single-family home sales over the next six months increased nine points to 61, the highest reading since March 2006.
On a regional basis, confidence grew strongest among builders in the South, while firms in the Northeast and Midwest also posted a gain. An index of confidence among builders in the West declined by one point.